Whisper it for now, but UK Plc may be turning a corner.

Source: Lions Gate/ Everett/ Rex Features

More often the hunted than the hunter in mergers and acquisitions over the past 18 months, UK companies have turned predatory, with three acquiring peers abroad already this year. While it’s still early days, this represents the strongest start to the year since 2011 for UK outbound activity.

“The improved equity market is clearly helping and the outlook is generally improving across Europe and, especially from an economic point of view, in the UK.”

This month Smith & Nephew struck a $1.7 billion deal for a US peer, ArthroCare, following in the footsteps of UK-based Amec, which agreed a $3.3 billion deal in January for Swiss rival Foster Wheeler, and of UK-listed cinema group Cineworld, which announced a $925 million deal to buy eastern European rival Cinema City International.

While all those deals had been in the works for a long time, their completion takes total deal value for UK outbound acquisitions this year to $10.1 billion, according to Dealogic, an eightfold increase on the same period last year. With the number of inbound M&A deals at its lowest since 1997 in the year to date, the strong start for UK outbound deals may indicate a shift.

Perhaps the clearest indication that investment banks expect the upturn to continue is that some are making a tentative return to the recruitment market in the UK.

As Financial News reported last week, Credit Suisse and Nomura are among the banks that plan to strengthen their UK businesses in the coming months. Citigroup is also understood to be looking at adding a couple of senior bankers within the existing cost base of its London team.

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Since the financial crisis, the boardrooms of UK Plc have been wary of M&A, seeking instead to make sure that their business is in the right place before considering combining it with another entity.

Confidence

But the improving stability in the economic outlook is translating into chief executive confidence both about their own businesses and potential targets, according to bankers.

Philip Yates, a partner at Perella Weinberg Partners, said there was an increasing belief that the shareholders and the market would applaud well thought through deals, rather than have a “conniption” every time M&A is used as a tool to increase shareholder value.

He added: “It’s nothing empirical, it’s just primeval, intangible, with confidence replacing fear. More and more we’re seeing a more positive attitude pervading corporate boardrooms.”

With the recovery still in its early stages, well-flagged deals are the order of the day. At Smith & Nephew, chief executive Olivier Bohuon has been vocal about his plans to reorientate the business towards growth.

After Cineworld’s UK expansion ran foul of competition issues – it was obliged to sell some cinemas after its £47.3 million acquisition of arthouse group Picturehouse – it has been looking at growth markets where it will not have similar issues.

The Amec deal too has been a slow burner, having been in the making for more than a year, according to one person familiar with the matter.

Like the hiring by investment banks, M&A activity is expected to be cautious at first.

Madelaine McTernan, head of UK M&A at Credit Suisse, said: “Initially I believe we will start to see a greater number of smaller (relative to the acquirer), debtfunded, synergistic acquisitions that sit squarely within companies’ existing strategic agendas.

“A positive reception to this type of deal should support increasing confidence and we may then start to see larger, bolder deals moving up the agenda.”

Bankers are also reminding boardrooms that debt cannot remain this cheap indefinitely. With a rates rise in prospect, they expect to see more simple bolt-on acquisitions before the cost of borrowing goes up.

Anthony Gutman, co-head of UK investment banking at Goldman Sachs, sees a “window of opportunity” for companies to debt fund acquisitions efficiently. He said: “I do think that people recognise that the cheap cost of funding is not something that is going to be long-term sustainable.”

Stability

Chief executives are certainly not rushing their fences. Rising market volatility over the last two or three weeks has made people pause as to whether the world is sufficiently stable to embark on major M&A.

Then, with the strength of the equity capital market, there may also be a lack of sellers. Ono, the Spanish cable operator majority-owned by a group of private equity firms, last week confirmed its intentions to explore a €7 billion initial public offering despite receiving an indicative bid from Vodafone.

For private equity firms, the IPO market is currently far more attractive than the M&A market as an exit route, according to Gutman at Goldman Sachs: “They’re saying that with these IPO valuations I’ll accept that I can’t have 100% liquidity,” he said.

So while no one inside the UK’s boardroom is getting carried away, there appears to have been a subtle shift in mood towards dealmaking. Maybe UK Plc is once more ready to make its voice heard on the international M&A stage.

--This article first appeared in the print edition of Financial News dated February 17, 2014 under the headline 'UK companies turn from hunted to hunters'